Accounting Equation & Business Account Types Quiz

Core Accounting Account Types

In accounting, all financial transactions are categorized into six main types. Understanding these is fundamental to the accounting equation: Assets = Liabilities + Equity.

Assets: Resources owned by the business that have future economic benefit.
- Examples: Cash, Accounts Receivable (money owed to the business), Inventory, Equipment, Buildings.
Liabilities: Obligations of the business to transfer assets or provide services to other entities in the future. These are debts owed by the business.
- Examples: Accounts Payable (money the business owes), Notes Payable (loans), Salaries Payable, Unearned Revenue.
Equity: The owners' residual claim on the assets of the business after deducting liabilities. It represents the owners' stake in the company.
- Examples: Owner's Capital, Retained Earnings, Common Stock.
Revenue: The income generated from the normal operations of a business, typically from the sale of goods or services. Increases equity.
- Examples: Sales Revenue, Service Revenue, Interest Revenue, Rent Revenue.
Expenses: The costs incurred in the process of earning revenue. Decreases equity.
- Examples: Rent Expense, Salaries Expense, Utilities Expense, Advertising Expense, Cost of Goods Sold.
Draws (or Dividends): Withdrawals of cash or other assets by the owner(s) for personal use. Decreases equity.
- Examples: Owner's Drawing, Dividends Paid.

The Accounting Equation: Assets = Liabilities + Equity

These account types are interconnected through the fundamental accounting equation. Revenue increases equity, while expenses and draws decrease equity.

Balance Sheet Accounts:
- Assets: What the business owns.
- Liabilities: What the business owes.
- Equity: The owner's stake in the business.
Income Statement Accounts (affect Equity):
- Revenue: Increases equity through earnings.
- Expenses: Decreases equity through costs of operations.
Statement of Owner's Equity Accounts (affect Equity):
- Draws: Decreases equity as owners withdraw funds.

Understanding Basic Accounting Account Types

Core Accounting Account Types

The Accounting Equation: Assets = Liabilities + Equity

Test Your Accounting Knowledge!

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